High speed rail could bankrupt Laos, but it’ll keep China happy

Author

Lecturer: Resources, Environment, and Development Group , Australian National University

Disclosure statement

Keith Barney does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

Despite impressive economic growth rates over the last decade, a third of Laos’s population still lives below the extreme poverty line of US$1.25 per day. Most of the extreme poor Laos are ethnic minorities living in rural and upland districts, who depend on local ecological resources for cash income and food.

Expanding transport infrastructure can no doubt be very important for effective poverty reduction – but it would be a stretch to argue that the country’s most urgent human and social development need is a high-speed rail connection between its capital, Vientiane, and its northern neighbour China.

Yet, the Lao government has reiterated its intention to integrate into an emerging ASEAN-China high-speed railway grid. At times, the country’s quest for rail takes on an almost fetishistic quality, with officials simply repeating the mantra that the Laos must move “from land-locked to land-linked”. But for all their zeal, the economic case for high speed rail in Laos remains weak.

CIA World Factbook

Two projects

Laos actually has two high-speed railway projects under consideration. The first and more expensive one, costing about US$7 billion, would form part of an integrated Kunming-Bangkok-Singapore railway. Extending 420km north from Vientiane, it must cross mountainous terrain and numerous river valleys in northern Laos.

This is a gargantuan undertaking for a country that’s GDP was US$9.4 billion in 2012. Nevertheless, the Laos National Assembly approved the Laos-China rail project in October 2012, proposing a US$6.8 billion loan from China’s Exim Bank to cover its cost. According to a 22-page document submitted to the National Assembly, the loan would be guaranteed by all of the income and assets of the railway, and two unspecified mining areas.

There is also a geopolitical angle. The potential for strategic and military applications of high-speed rail projects has been noted, and some argue that China is working to push an Asian rail network to extend its power and influence throughout the region.

Laos’s second line would run 220km east-west through central Savannakhet province. It is still quite unclear how this line would be connected to any supporting rail infrastructure in either Thailand or Vietnam. At present, it represents a rather ambitious commercial venture to link the languid provincial town of Savannakhet with the small border village of Lao Bao, at a proposed cost to the previously unknown Malaysian firm Giant Consolidated Ltd of some US$5 billion.

The financier of the Savannakhet railway project is reported to be an entity named “Rich Ban-Corp Ltd”, initially reported as “Rich Banco” and based in New Zealand, but now apparently registered in Hong Kong. In the UK, Rich Ban-Corp has been listed as an “unauthorised firm”, and investors are warned not to do business with it.

These expensive new railway project proposals have drawn the attention of Laos’ development partners. In October 2013 the IMF warned that the Lao-China railway would result in Laos’ total external debt leaping from its current level of 32.5% of GDP to as high as 125% of GDP.

According to the IMF, this would exceed Laos’ threshold debt levels. The country could suddenly be very vulnerable if, for example, China experienced a credit crisis, or if prices for Laos’ key export commodities such as copper took a sustained downturn.

Mega-preneurs

Given the high stakes – the price tags, the resource-based loan guarantees, the implications for national sovereignty – one might expect the case for the railways to be spelled out. However it is not at all clear what sort of analysis is guiding Lao decision makers.

The pros and cons of rail projects should be assessed through detailed economic calculations. This could mean examining the potential to actually promote resource exports, the boost to economic productivity through measures such as the “value of time travel saved”, or the effect on the labour market of integrating second tier cities with the main urban centers. Estimated benefits for tourism revenue could be quantified.

In Laos, this sort of analysis is, so far, completely missing. Instead, a significant part of the Lao railway megaproject game seems to involve efforts by “megaproject entrepreneurs” to convince powerful decision makers and state institutions that their investment plan has momentum, with deep pocketed (yet conveniently obscure) financial backers waiting in the wings.

Laos is particularly susceptible to these sort of opaque dealings through personalised networks. Its state institutions are still a work in progress, and are unable or unwilling to foster a culture of transparency in decision making. The authoritarian nature of the party-state in Laos discourages critical debate or an open competition of ideas.

Perhaps there are defensible economic justifications for high-speed rail in Laos. The boost to regional integration and Laos’ agricultural and mineral exports such as potash, copper, and gold could be significant, although it is not clear why expensive high speed infrastructure would be required for exporting these resources. Moody’s rating agency seems to accept the positive arguments anyway, indicating the Lao-China railway project will be “credit positive” for the country.

But what of the opportunity cost? Even if there were a solid business case for high speed rail, it would still need to be considered alongside the potential national economic benefits of investing that US$7 billion across a range of key development sectors, from highway upgrades, to child malnutrition, maternal health, agricultural extension, and youth education and training programmes.

It is time for Laos’s government to open up and provided some transparency on how these key decisions around high speed rail are going to being made, through what information and data. The country may be about to commit a significant portion of its wealth to these projects; its citizens deserve to know they are getting a good deal, and aren’t being used as a pawn by other nations and their corporate interests.

Moving away from back room wheeling-dealing and towards fuller transparency and the rule of law could help build confidence in Laos’ institutions and governance standards. It would also help future, quality investment projects achieve their full potential for promoting equitable economic growth and reducing poverty.